A Plan Sponsor Addresses High Earners’ Savings Needs

Republic
National Distributing Company used to have a nondiscrimination testing
problem.

“We
were failing, miserably, each year,” says Francie Purnell, corporate director,
retirement plans, at Republic. She adds that the company noticed a lot of
non-highly compensated employees (NHCEs) had been automatically enrolled in the
plan and never increased their deferral rates, limiting the amount highly
compensated employees (HCEs) could contribute.

In
2012, Republic decided to limit the percentage of salary HCEs could defer to
the 401(k) plan to 5%, as its default deferral for automatic enrollment was 3%.
But, while it worked to address the problem of NHCEs not increasing their
savings rate, the company realized HCEs “are people who really want to save but
are unable because of testing,” Purnell says.

So, the company
worked with Vinings Management Corporation, a consultant for nonqualified
retirement plans, to create a nonqualified deferred compensation (NQDC) plan.
The plan was effective January 1, 2012, and not only allows HCEs to save for
retirement, but offers in-service accounts as well to help employees save for
things such as children’s college costs. For example, Purnell says, an HCE can
designate 3% of salary to be deferred into an account to be withdrawn in five
years for a child’s education expenses.

Limiting
the deferrals for HCEs while offering a NQDC plan solved Republic’s
nondiscrimination testing problem, while also allowing HCEs to save what they
wanted.

Meanwhile,
to solve for NHCEs not increasing their savings rates, the company decided to
implement an automatic increase, which led them to discover another way to
help HCEs save more for retirement. In June 2014, after bumping up the default
deferral percent for automatic enrollment to 5% and coinciding with annual
merit increases for employees, any 401(k) plan participant deferring less than
5%, had his or her deferral rate automatically increased to that percentage,
with an opt-out feature. According to Purnell, Republic then conducted a
preliminary nondiscrimination test, which showed now that 91% of NHCEs
contribute 5%, Republic could increase HCEs’ maximum allowed deferral to 7% and
pass the test. The company did so as of January 1, 2015.

Republic
has increased the default deferral percent again this year to 6%. Purnell says
the company considers whether to do an automatic increase each year because it
is an additional cost to the company, but this year Republic plans to bump
anyone deferring less than 6% up to 6%.

“I
believe we focus more on non-highly compensated employees’ retirement
readiness, but we want every employee to retire comfortably when they want to
retire,” Purnell says.

She notes that since offering
the NQDC plan, participation has been consistent at around 68%, and the median
deferral into the plan is 8%. In addition, the plan allows HCEs to defer
bonuses into the plan and many take advantage of this and defer 75% of their
bonuses. “They are able to save well above the $18,000 limit [for qualified
plan deferrals],” Purnell says. “It’s incredible the amount of money employees
have been able to save in such a short period of time.”